If a production function has constant returns to scale, it means that if we Select one:...

If a production function has constant returns to scale, it means that if we

Select one:

a. increase capital and labour by 5 percent each, we increase output by 10 percent

b. increase capital and labour by 10 percent each, we increase output by 10 percent

c. increase capital by 10 percent and increase labour by 5 percent, we increase output by 7.5 percent

d. none of the above

Expert Solution

The correct answer for the question is option [b] - Increase in capital and labour by 10 percent each , we increase output by 10 %.

REASON:

The production function is said to have a constant returns to scale . If that is so then according to the Cobb-Douglas production function, if the output increases in exact proportion to that of an increase in all the factors of production then the firm is said to have a constant returns to scale.Here,it is said that capital and labour increases by 10% and the output in turn also increases by 10%. So the firms production function has a constant returns to scale.

Option [a] is incorrect because the factors of production increases only by 5% but the output has erractically increased by 10%

Option [c] is also incorrect because the capital increases by 10% andlabour by 5% and output by 7.5%. The factors are not increased at a common rate and thus the output is also not increased in exact proportion to the factors of production.

Rahul Sunny answered 1 year ago

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